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CreditTech after COVID

Lending fintechs in Asia that survived the pandemic are retooling for professionalism and profitability.



DigFin is publishing a special series on how CreditTech companies in Asia have survived the COVID-19 pandemic and what lies in store.

In Asia’s fintech scene, lenders (“CreditTech”) had a tough 2020, but the coming year will see the industry emerge in a more compact but resilient fashion.

DigFin’s series on CreditTech after COVID looks at how both niche fintechs as well as market leaders are retooling for 2021, as well as how venture capitalists are positioning lenders within their portfolios.

For many fintech companies in Asia, the COVID-19 pandemic was a boon, accelerating many digitization efforts that made their services more valuable. Payments, wealth and insurance were often beneficiaries.

That’s not true for fintech lenders, though. Their models were vulnerable to the virus’s impact. Economic lockdowns hurt many borrowers, while a surging stock market made lending less attractive to investors.

Ultra-low interest rates have also hurt margins for those fintechs that used their own balance sheets to lend.

As a result, many Asia-based lending fintechs in 2020 closed, were acquired, or quietly changed business models. The rapid rise of CreditTech in Southeast Asia and India, starting from about 2017 (when the sector came under regulatory scrutiny in China), stalled.

For the most established CreditTechs, 2020 was a chance to prove their resiliency. Yet even market leaders are still fighting to achieve something like escape velocity.

“We’ve grown bigger but not bank-scale,” said Kelvin Teo, co-founder of Funding Societies, the biggest SME lender in the region.

Post pandemic

The sector is emerging on better footing, however. More fintechs that began as pure P2P platforms are beginning to facilitate their own loans, to increase their skin in the game. Platform businesses are looking to professionalize the investors on their platforms. Data for credit models is improving – or partnerships to secure such data are being struck.

CreditTech is maturing, in other words. The biggest change is probably a newfound focus on making these businesses profitable rather than focus on growth at all costs.

Lending is not like other technology businesses in that it is not a winner-take-all category.

The venture capital model for growth companies (think e-commerce) involves burning as much cash as possible in order to acquire users as quickly as possible and shut out any competitors as ruthlessly as possible.

That’s not true of lending. Just as there remain many banks in a given market, there are many ways to lend. CreditTech spans origination, distribution, and collection. It deals with unsecured consumer loans, salary loans, payday loans (including buy-now pay later installments), credit-card programs, SME cash loans, accounts receivables (factoring), and supply-chain finance.

Investors (that is, the lenders) also vary, from wealthy individuals and family offices, to hedge funds, to commercial banks, to institutional investors such as pension funds and insurance companies.

Within Asia, models vary: what works in small, glitzy Singapore is different to what works in India or the Philippines.

Maturity versus mojo

CreditTech is maturing across these sub-categories, with sounder lending practices, higher quality users, and a focus on sustainable development. The longer challenge will be for these companies to figure out if they’re technology companies or if they’re essentially banks – nimbler, more efficient, and with a different customer segment, but providing an equivalent service.

Funding Societies’ Teo said his company isn’t yet bank-size. It could get there. Whether these startups are tech or fin will matter to their future rounds of funding and eventual exits. They are now looking at hot BNPL players like Affirm and AfterPay, which enjoy sexy valuations. But other P2P lenders that were once valued like tech plays (think Lending Club in the U.S.) now trade like financial stocks, based on price-to-book.

In other words, as CreditTech matures, it is at risk of being regarded as a better version of banking. If founders and their backers want to command the dizzy valuations of tech companies, they will have to find a way to act like them.

Therefore before turning to the fintechs, let’s understand what VCs see happening with the credit plays in their portfolios. Click here to continue.

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